Finance Minister Ricardo Bonilla said this month that the government would present a bill to make the rule more flexible, in a package of measures aimed at boosting weak economic growth that is weighing on public finances. Real GDP growth slowed sharply to 0.6% last year following a strong post-pandemic rebound, and Fitch forecasts a modest 1.1% expansion in 2024. President Gustavo Petro has previously said the fiscal rule should accommodate counter-cyclical public spending.

Colombia’s ‘BB+’/Stable sovereign rating, affirmed on December 7, 2023, is constrained by fiscal challenges, high commodity dependence and structurally large current account deficits. Large fiscal deficits, an increasing public debt burden and the decline in fiscal policy credibility were factors in Colombia’s downgrade to below investment grade in July 2021.

Tax reforms were passed in November 2022, and high nominal GDP growth and peso appreciation supported deficit and debt reduction in 2023. But obstacles have arisen to consolidation. November’s Constitutional Court ruling on tax deductibility of oil and coal company royalties prompted the government to increase its 2024 central government deficit target to 5.3% of GDP in February’s Financing Plan, from 4.4%.

Fitch Ratings see risks to the revised target, for example, in securing Congressional approval for an arbitration system to speed up settlement of tax disputes. Budget rigidities limit the scope for spending cuts other than to capital expenditure, which could further weaken growth prospects.

The New York-based ratings agency also expect rising expenditure to meet some social demands, although prospects for Petro’s landmark pension and healthcare reforms are uncertain. In April, a Senate committee rejected a healthcare bill, although Petro says he will reintroduce healthcare reforms and may seek constitutional changes to implement them.

The Senate has passed a pensions bill that, if approved by the Chamber of Representatives by June 20, would take effect from July 2025. Allotted contributions up to a threshold of 2.3x the minimum wage would no longer go to individual accounts in private pension funds, but to the pay-as-you-go public pension fund and a new public savings fund.

The bill would prevent people moving existing pension assets from the private to the public system, which often pays wealthier workers higher benefits. By ending competition between the private and public systems, it would eliminate the implicit subsidy for wealthier workers that increases the public system’s long-term costs.

The bill creates a solidarity pillar for people three years beyond retirement age who are economically vulnerable or who are in dire poverty and do not qualify for a pension. The government estimates its initial cost at 0.3% of GDP. However, the absence of parametric reforms means the overall estimated pension liability would increase over time. Governments could be tempted to increase pensions and extend coverage, adding to fiscal pressures from a large structural central government deficit.

The public savings fund would be managed by the independent central bank of Colombia, which has contributed to the country’s record of macroeconomic stability. The impact on domestic funding markets depends on the fund’s investment guidelines. For example, a publicly run fund could boost government financing sources to the detriment of the private sector.

Lower house approval of the pensions bill is not certain and Fitch has not incorporated additional costs from healthcare and pension reforms into its fiscal forecasts. The rating agency’s baseline is for general government debt/GDP to rise to 56.3% in 2025, as forecast primary surpluses will not stabilize the ratio even as growth rises to 2.8% in 2025.

No detailed legislative proposal to amend the fiscal rule has emerged and it is unclear whether Congress would approve one. Without major changes in fiscal policy, medium-term central government deficits will be about 4.5% of GDP. This would not comply with the rule’s existing provisions.

Early in the week, focus was on Colombia’s first quarter GDP number (0.7%), which was above estimates. Industry (-5.9%) and commerce (-0.8%) continue to struggle, but the public sector (5.3%) and agriculture (5.5%) reported positive numbers. Construction (0.7%) finally rose, but the sector needs to offer much more in order to be the economic driver it should be.

The National Administrative Department of Statistics (DANE) also reported the latest real sector data for March, with manufacturing production (11.1%) and retail sales (5.6%) falling significantly once again. These compute with both the GDP and industrial activity data, not to mention Banco de la República’s continued stubbornness on reducing rates at the appropriate rhythm. The government has already stated that if the central bank doesn’t breathe life into the economy, it will via raising the debt ceiling — or putting some flex into the fiscal rule.

However, reacting to this, Fitch Ratings stated that tampering with the fiscal rule would only hinder the nation’s hopeful return to investment grade. They added that the same fiscal deficit was part of the reason that the administration of former President Iván Duque lost the investment grade in the first place.

Colombian David Velez has created a regional phenomena with Nubank, albeit he had to go to Brazil to do it, however his homeland has proven to be less welcoming. This week Velez spoke of the complicated regulatory environment in Colombian and the complications surrounding the banks plans to expand further.

Perhaps that is why he started in Brazil, a country that is light years ahead when it comes to its financial architecture and authorities that are far more enlightened when it comes to providing a more and efficient environment for clients.

Superfinanciera of Colombia is jurassic by comparison —  fearful of change — a fact borne out by its intransigence as Bolsa de Valores Colombian stock exchange has slowly died in front of our eyes, with the only recourse being to salvage itself via nuam exchange. Although, no doubt, Superfinanciera will have a say along the way.

As for the banking sector, it has been a high-cost oligopoly — for decades dominated by Bancolombia, BBVA, Grupo Aval and Banco Davivienda — with Asobancaria seemingly happy with the current situation. There is much chatter about open finance, etc. — but it will only happen on the terms of the current dominant players.

Colombia needs 10 neobanks, as well as a raft of other financial institutions, to both lower fees and improve client attention.

There is much chatter about startups and fintechs.

But most lack the size or expertise to compete with the big boys — and many will sink without trace.

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On this occasion, it is regarding the impact of El Niño.

Both water and energy are in short supply, and suddenly it needs to be the government’s fault. Reservoirs have fallen below 30% — approaching critical levels. While the weather is slowly turning more rainy, it’s not happening quickly enough.

Blaming the government is both pointless and inaccurate. If anything, El Niño has been milder than expected, so what were they meant to want about? Let’s not forget that months before the drought even started, Colombian President Gustavo Petro was trying to implement special measure to protect the worst impacted regions — and these measures were blocked by the courts.

Now, in order to save water and energy, today has been named a “Civic Day” in Colombia where effectively there is no obligation within the public sector to go to the office or study. It’s a drop in the bucket — or reservoir — but perhaps this is better than doing nothing during a crisis.

Every journalist is now a climate expert, producing articles about Colombia needing more solar power in order to produce counter-cyclical energy. This is very true, and Colombia has been disastrously slow in building out solar energy. But that isn’t on Petro. In fact, this is a government that have discussed green energy since the day they began, in the face of heavy criticism, while overseeing the highest oil production in eight years. Fortunately, solar farms are now starting to appear all across the country.

In economic news, Fedesarrollo released its April survey, which saw no change in the 2024 inflation estimate (5.51%) but an increase in year-end overnight interest rate expectations from 8.00%-8.25%, which doesn’t quite compute. Meanwhile, the organization’s GDP estimate was also unchanged, projecting growth of 1.3% in 2024 and 2.5% in 2025.

Estimating GDP is a tricky business. Last week, the the World Bank also lowered its 2024 estimate for Colombia to 1.3% (down from 1.8%), but they are now looking at growth of 3.2% for 2025. Meanwhile, this week the International Monetary Fund estimated 1.1% and 2.5% for the next two years, respectively. Of note: the IMF expects Venezuela to be the fastest-growing economy in the region at 4.0%, which can only be good for Colombia.

The real sector continues to struggle according to the National Administrative Department of Statistics (DANE). February saw retail sales (-1.8%) and manufacturing production (-2.2%) both struggle, much as expected. Interest rates may have begun to fall, but Banco de la República has yet to get the message fully across to the market and consumers.

The reform process is crawling forward. There have been advances on both the pension and education sides — but there’s still a distance to go.

Finally, the Colombian peso has been stable this week despite Middle East events, while the COLCAP is slipping after a good start to 2024. That said, volumes for the index are at least more healthy than they wore in 2023.

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To start, in a report this week, Davivienda Corredores reiterated the local experts view that El Niño will disappear in April as we move towards a normalized climate pattern. By August, however, we can expect La Niña to arrive.

Unfortunately, despite the hardship that El Niño brings, it is is the biblical rains of La Niña that traditionally brings greater suffering. There is the human cost of landslides, which in turn block roads and highways to make the time to market both more lengthy and more expensive. This leads to higher inflation. So out of the fire, onto the floor for a few months — and then into the frying pan. Keep an eye on this, and hopefully the authorities are wrong.

Fedesarrollo gave its latest look at the market and expectations for 2024. They are looking for GDP growth of 1.4% (up from their projected 1.3% in January) and a year-end CPI of 5.4%. They are looking for overnight interest rates to close 2024 at 8% (currently 12.85% so much work to do) and the Colombian peso to remain stable, ending the year at 4,071 to $1 USD. That GDP number is slightly higher than the 1.3% the International Monetary Fund estimated a few days ago.

For those still looking at Colombian equities, energy is preferred sector, with ISA Interconexión Eléctrica and Grupo Energía de Bogotá being two of the top three picks.

Fedesarrollo also reported the latest retail confidence (14.5%) and manufacturing confidence (0.2%) figures for January. There was small decline in the former, but a healthy increase in the latter (up from -4.3% in December). In the same report, fourth quarter 2023 exporters reported a marked increase in expectations going forward.

The government, while feeling out their budget plans for 2024, have also given more powers to President Gustavo Petro in terms of some disbursement. Colombian Finance Minister Ricardo Bonilla also announced that they were also looking hard at infrastructure projects that aren’t advancing and renegotiating their terms. Such a movie would free up resources currently earmarked for other priorities. It’s complicated and lacking transparency, but be aware of it.

In the same vein, Petro has again implored his own team to travel in economy and to hold virtual meetings where possible in order to save money.

In politics, the labor and pension reforms will be back on the congressional menu next week. I’m not sure what they have all been doing for the month since holidays ended. Not a lot, most probably.

Finally, the Supreme Court again failed to elect a new Attorney General. They will try again in a couple of weeks. The different political parties, all of whom have skeletons in the cupboard, are desperate to have their man or woman in charge.

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Quarter-over-quarter, the main laggards were construction (-1.6%), commerce (-2.3%), and industrial manufacturing (-4.8%). There was an identical picture on a full-year basis for these sectors, as they dropped in 2023 by 4.2%, 2.8%, and 3.5%, respectively.

To the upside, the finance sector was the highlight ,with a quarter-over-quarter increase of 4.7% and year-over-year jump of 7.9%.

The numbers will be a disappointment — especially as they are so overshadowed by the 2022 reading of 7.3%.

However, they won’t be a shock to anybody.

The global economy has been struggling to shrug off inflation worries for well over a year, with respite only just arriving, and this has led to many central banks maintaining overnight rates at higher-than-ideal levels.

Colombia’s Banco de la República is no exception — and while its stubbornness in reducing rates can hardly be seen as responsible for the fourth quarter performance, the first quarter of 2024 recovery is likely to be modest. And that is in large part due to the committee’s refusal to lower rates until December.

As stated before, if you don’t believe the Ministry of Finance then you need simply listen to ANDI and Asobancaria, just two of the private sector federations that have pointed the finger at Leonardo Villar and the other central bank committee members.

We will see how 2024 develops. But there are some shoots of optimism.

January inflation was lower than expected, and the latest consumer confidence reading from Fedesarrollo was a step in the right direction. On the other hand, Camacol Colombia has also reported that home sales dropped 32.3% for the same month — although December construction licenses rose 28.5% year-over-year and were the highest for that month since 2019. Signals remain mixed overall.

Unfortunately, the central bank will be sitting on their hands this month (due to the upcoming meeting not including a rate decision) when they should be cutting rates by 50 basis points.

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Photo: Banco de la República, the central bank of Colombia, in Bogotá. (Photo credit: Camilo Sanchez)

Although perhaps there shouldn’t be a massive surprise.

First, the numbers: Industrial (-6.2%), commercial (-3.5%), and construction (-8%) were the headline grabbers, with the situation being somewhat saved by better numbers in real estate (+1.8%), the public sector (+5.3%), and finance (+1.6%).

But perhaps the real headline grabber should be Banco de la República, which — in its infinite wisdom — has chosen to ignore the other 99% who understand that 13.25% overnight rates choke off an economy.

Yes, they are concerned about inflation. But they have clearly done enough damage and need to upgrade the November meeting to include a decision on rates — especially as October CPI was lower than expected — and get busy cutting.

The government recently stated that it still believes 1.8% growth is possible this year, noting that they were above the estimate of IFC (1.4%) and others. After seeing this quarter’s data, that now seems a pipe dream.

Colombians may already have planted the Christmas tree and started spending. But even their December largesse is unlikely to compensate for the work done already by the central bank.

The National Business Association of Colombia (ANDI), FENALCO, Asobancaria and the government are likely to have plenty to say on the subject this month. Political opponents will suggest that a lack of confidence in the administration of President Gustavo Petro is slowing investment.

But who is going to borrow and invest their hard-earned Colombian pesos at these interest rates?

Minister of Finance Ricardo Bonilla already had his say: the GDP report is bad, and the central bank should have started cutting rates in September.

Who is to argue — except the five committee members who thought they knew better?

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Four points of order on the matter:

1. Is it not incredible that, with El Niño having been originally forecast for September, that the matter is only up for serious debate in October?

2. Prepare yourself for another Colombian blame game. The private sector and government, which need to work together to ensure energy security, will firstly prioritize making sure that the public know ‘it’s not on them!’

3. In a country with so much — hydroelectric power, a once plentiful gas production, rising oil output, enormous coal supplies, enough sun for as many solar panels as you wish to install and howling winds on both coastlines — there has been an epic failure to develop a failsafe energy system.

4. Any producer, transmitter or end supplier who claims to be struggling financially, needs to have a long look at themselves. Energy prices are skyrocketing are there must be plenty of profit to go around.

Despite the rain this week, the environment minister announced an immediate $410 million USD relief fund to combat the effects of El Niño. Hopefully, the courts, where half of Colombia’s national budget appears to get wasted, won’t block this measure, like they did with the proposal from Gustavo Petro a few months ago.

In other news, the International Finance Corporation (IFC) raised its 2023 and 2024 GDP estimates for Colombia. They have been moved up from 1.0% and 1.9% to 1.4% and 2.0%, respectively. For context Fedesarrollo, in September, estimated 1.2% and 2.0%. In this last report Fedesarrollo also moved 2023 inflation estimate up from 9.2% to 9.43%. The IFC’s inflation projection is much, much higher at 11.4%, suggesting no further declines in 2023.

Consumer confidence for September according to Fedesarrollo rose 0.9% to -17.9%. There were no significant changes in the underlying sectors.

A report from OECD noted that Colombian unemployment (9.5%) is still very high versus the group average of 4.8%. Nonetheless, the focus here should be on how far that number has come down over the past year and the million extra jobs that have been created.

September saw $1 billion USD in TES bond sales/outflows, the largest number of 2023. Analysts (including Alianza Valores SCB) view this as profit taking. Due to the strong/bouncing Colombian peso, that profit has been cut to around 12.5%, but that was, according to Bloomberg, still a huge return next to other EM countries.

Finally, Medellin pantomime villain Jaime Gilinski was grabbing headlines as he helped bail out Metrobank in his adopted UK homeland — a busy man.

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Here’s a summary of some of the key areas.

GDP Growth

Colombian GDP for 2023 saw the outlook rise from 1.1% to 1.5%, moving closer to the estimates of overseas agencies. Once again — despite opinion polls declaring we are heading for Armageddon — we see various stakeholders increasing the GDP outlook while there was also a jump in consumer confidence last week. For 2024, which will depend greatly on the actual 2023 results, there was a small reduction in the GDP estimate, falling from 2.3% to 2.2%.

Inflation

CPI estimates for 2023 rose from 9.15% to 9.22%. For the 12-month forecast, it is expected to fall to 6.82%. All eyes will be on the June reading from DANE in a couple of weeks.

Interest Rates

There has been a slight cooling on the outlook for the overnight rate for year-end of 2023, from 12.0% to 11.75%, with a 12-month outlook of 9.5%. For this month, the Colombian central bank will leave rates at their 13.25% peak.

Colombian Peso

There has been a dramatic revaluation of the currency recently and that is reflected in the latest analyst estimates. The new year-end 2023 consensus is 4,300 pesos to the US dollar versus 4,600 a month ago. In reality the peso never deserved to be at 4,500+ level, so this is a welcome, more-rational view.

Equities

There is a renewed sense of positivity around the COLCAP, with 81.5% believing the market will rise over the next three months versus 69.2% a month ago. In terms of sectors, holdings companies are the preferred choice, in particular Grupo Argos. In terms of other names, ISA Interconexión Eléctrica and Nutresa, despite the uncertainty over the new Gilinski leadership, are also in demand.

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The figure for 2018 is slightly higher than the 2.7% gross domestic product (GDP) growth forecast the global organization made for the Andean nation in May, an upward revision that comes in contrast to the IMF’s overall expectations for the global economy.

While it continues to see expansion across the world, the winds of positivity have begun to change, with the body forecasting 3.7% global growth in 2018 and 2019 — down from the 3.9% it had expected six months ago.

Though this is the same global growth rate seen in 2017 — and higher than any year from 2012 to 2016 — global conditions currently look less rosy in terms of ongoing expansion.

“Last April, at the time of our last World Economic Outlook, the world economy’s broad‑based momentum led us to project a 3.9% growth rate for both this year and next,” Maurice Obstfeld, economic counsellor and director of the research department for the World Economic Forum, told the press. “Considering developments since then, however, that number now appears overoptimistic. Rather than rising, growth has plateaued.”

He described troubled waters ahead related to uncertainty from the United States’ continued push to raise tariffs on Chinese goods and the retaliatory action from Beijing. This is further straining already-slowed growth in China and having knock-on effects in both the Euro zone and other developed economies as well as emerging markets from Brazil to India.

“There are clouds on the horizon,” said Obstfeld. “Growth has proven to be less balanced than we had hoped. Not only have some downside risks that the last [World Economic Outlook] identified been realized, the likelihood of further negative shocks to our growth forecast has risen. In several key economies, moreover, growth is being supported by policies that seem unsustainable over the longer term. These concerns raise the urgency for policymakers to act.”

Unlike Colombia, which is enjoying a significant recovery this year following a nine-year-low 1.8% growth rate in 2017, the other largest economies in Latin America continue to struggle.

The IMF downwardly revised the 2018 growth rates of Brazil (to 1.4% in 2018), Mexico (2.2%), and Argentina (-2.9%) in this most recent update. This was a similar story across the emerging markets, with India, Turkey, South Africa, Russia, and Nigeria all facing negative revisions to their growth forecasts as well.

But Colombia is not alone in receiving good news from the IMF this week.

“Even if you look across the emerging market landscape and the frontier market landscape,” said Obstfeld, “it is not the case that there are downgrades everywhere or that all countries are doing badly … We have upgrades in the forecast for Chile, Colombia, Peru, Bolivia.”

He added that “it is a very mixed picture, but when you do have this sort of uneven growth and countries are not all pulling in the same direction, you do see less momentum than we were so excited about six months ago. Where things will go from here on in, we do not know.”

The year-over-year inflation rate in August came in at 3.1%, the lowest figure in years and just a tick above the midpoint within Banco de la República’s target range of 2%-4%. This marked the sixth straight month that annual inflation was below 3.2%.

The central bank’s analysts expect a slight rise in the next three months, but they still expect inflation to conclude the year at 3.2%. This will remain relatively stable through the end of next year, landing at 3.3% in December 2019, per analyst projections.

In terms of growth, “the economic activity indicators available for the third quarter suggest that the economy would have continued growing slowly, albeit somewhat faster than in the first half of the year,” said the bank in a statement.

Banco de la República has continued forecast the Colombian gross domestic product (GDP) to grow by 2.7% for 2018.

“The average growth of the country’s trading partners remains dynamic, driven mainly by the developed economies,” stated Banco de la República. “The international price of oil and the terms of trade continued to increase and continue driving the national income.”

READ MORE: On the Rise – Colombian Economy Grew by 2.8% in Second Quarter

The central bank cut Colombia’s benchmark interest rate by 25 basis points to 4.25% at its April meeting. It has since held the rate steady over the subsequent five months.